DBRS Confirms Nestle at AA (high) and R-1 (high)

DBRS has today confirmed the ratings of Nestlé S.A. and Nestlé Capital Canada Ltd. (Nestlé or the Company) at AA (high) and R-1 (high) following the various investing and financing initiatives announced by the Company over the past two days. The announcements include Nestlé’s planned sale of its remaining interest in Alcon Inc. (Alcon), new share repurchase program, and proposed acquisition of Kraft Foods Inc.’s (Kraft) North American frozen pizza business. The impact of the aforementioned items, collectively, on Nestlé’s financial and business profile over the near to medium term is expected to be relatively neutral.

The sale of the Company’s remaining 52% stake in Alcon, a global medical company specializing in eye care, to Novartis Inc. (Novartis) for approximately $28.1 billion in cash, is viewed as positive by DBRS but not entirely unexpected. Nestlé will realize significant cash proceeds, an impressive return on its initial investment, and will add to its already strong liquidity position from the disposition. The transaction is subject to regulatory approval and is expected to be completed in mid-2010. The loss of Alcon earnings and cash flow (Alcon generated approximately CHF 2.4 billion in EBIT in 2008, with margins above 30%) will partly offset the benefit of the sale proceeds, but the impact on credit metrics will be modest. Alcon contributed roughly 14% of EBIT (before unallocated costs) on a fully consolidated basis.

With respect to the new repurchase program, it is viewed as modestly negative to Nestlé’s financial profile. In conjunction with the sale of Alcon, the Company announced its intention to launch an additional share buyback program of CHF 10 billion (roughly $9.7 billion) once its current CHF 25 billion program is completed this year. However, the proceeds from the Alcon sale will easily fund future repurchases and the pace of repurchases will slow under the new program.

Lastly, Nestlé announced today that it has agreed to acquire Kraft’s North American frozen pizza business for $3.7 billion in cash. While the purchase exceeds the Company’s annual budget for acquisitions (CHF 2 billion to 3 billion), the significant proceeds generated from the Alcon sale easily mitigate the impact on Nestlé’s financial profile. Kraft’s North American frozen pizza business is expected to generate sales of $2.1 billion in 2009, with an estimated EBITDA of close to $300 million, EBIT of $279 million, and synergies of roughly 7% of sales expected to be realized within five years. The acquisition will enhance the Company’s modest position in this market (subject to regulatory approvals, expected in 2010) and lead to Nestlé becoming the global leader in frozen pizza sales.

Upon completion of the Alcon sale, the Company’s net debt position will drop by over CHF 10 billion when taking into account the new share repurchase program and Kraft frozen pizza business acquisition. Nestlé’s credit metrics are expected to remain comparable with levels at end-June 2009 (and improve on a net debt basis) when adjusting for the sale of Alcon. While there remains the possibility for future large acquisitions, Nestlé is committed to maintaining a strong financial profile that is consistent with its current ratings.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Consumer Products, which can be found on our website under Methodologies.

This is a Corporate rating.